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Condo Act Reform – #2 Financial Management: Fraud

Fraud has been a hot topic in condominiums for the past few years. While incidents with large monetary amounts involved receive plenty of media attention, there are many incidents that receive little or no media attention because of the relatively small amount involved.

Not surprisingly, the working group and expert panel reviewed the matter in great detail to determine if further steps are required to discourage fraud in condominiums. They identified the following areas of concern:

Theft & Embezzlement – large sums of money are kept in many reserve funds and affordable insurance on those sums does not exist;

Kickbacks – most contracts are reviewed and signed by the board without any input from the owners, which makes it very difficult to prove a kickback; and,

Frivolous Spending – owners are concerned about the temptation for boards to spend on unnecessary or frivolous projects.

Unfortunately, the working group and expert panel have been unable to determine how the amendments could address these problems. The only recommendation made is that a sealed-bid process should be used for all service contracts valued over a set amount (i.e. $50,000.00). I agree with this recommendation. I believe a bid process should be used more frequently in condominiums and a sealed-bid process would help reduce the likelihood of a kickback.

My only concern with this area of the report is the suggestion that pooling the investments of several condominiums could potentially reduce the risk of theft and embezzlement because of new controls that would be in place. I cannot support the idea that pooling investments is an improvement to the current Act. If anything, it just means that more funds would be available for fraud. In my opinion, I would rather see further restrictions or controls on reserve fund investments without pooling investments. For example, a requirement could be that the board must send a notice to all of the owners before it is able to invest, renew or cash-in an investment over a certain amount. A waiting period could be required as well to allow the owners to requisition a meeting if they disagreed with the proposal.

I also believe that there should be some mechanism for searching for the officers and directors of condominiums like with other corporations. This would reduce the likelihood of fraud as financial institutions, insurers, other lenders, and lawyers could more easily determine the names of the directors (instead of relying upon the word of the purported directors or the property manager). It would not be too onerous to complete an annual filing within a certain number of days of the annual general meeting. There could be penalties for failing to file or late filing as with other types of corporations as well.